SMART EMPLOYEE BENEFITS INC · SMART EMPLOYEE BENEFITS INC: MANAGEMENT DISCUSSION AND ANALYSIS – NOVEMBER 30, 2015 6 BizTalk, PeopleSoft, BPO, ITIL, Professional Services, Hosting,

SMART EMPLOYEE BENEFITS INC

www.seb-inc.com

Management Discussion and Analysis

For the year ended November 30, 2015

SMART EMPLOYEE BENEFITS INC: MANAGEMENT DISCUSSION AND ANALYSIS – NOVEMBER 30, 2015 2

Contents

Management Discussion and Analysis of Financial Statements ................................................................... 3

Forward Looking Statements, Risks and Uncertainties ............................................................................ 3

Non-IFRS Financial Measures ................................................................................................................. 3

Company Overview ...................................................................................................................................... 5

Company Developments During and Subsequent to fiscal year ended November 30, 2015 ........................ 7

Financial Discussion ................................................................................................................................. 7

Select Financial Highlights for the quarters and years ended November 30, 2015 and 2014 .............. 7

Quarterly Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended

November 30, 2015 and 2014 .............................................................................................................. 9

Quarterly Consolidated Statements of Financial Position for the fiscal years ended November 30,

2015 and 2014 .................................................................................................................................... 12

Quarterly Consolidated Statements of Cash flows for the fiscal years ended November 30, 2015 and

2014 .................................................................................................................................................... 16

Operations Discussion ............................................................................................................................ 19

Benefits Division ................................................................................................................................ 19

Technology Division .......................................................................................................................... 20

Corporate Division ............................................................................................................................. 21

Risk and Uncertainties ............................................................................................................................ 22

Going Concern ................................................................................................................................... 22

Uncertainty of Liquidity and Capital Requirements .......................................................................... 22

Credit Risk ......................................................................................................................................... 23

Interest Rate Risk ............................................................................................................................... 24

Reliance on Contracts with Key Customers ....................................................................................... 24

Acquisitions and Integration .............................................................................................................. 24

Information Technology Systems ...................................................................................................... 25

Confidentiality of Personal and Health Information .......................................................................... 25

Key Personnel .................................................................................................................................... 25

Accounting, Tax and Legal Rules and Laws ...................................................................................... 25

Internal Control over Financial Reporting and Disclosure Controls and Procedures ........................ 26

Capital Investment.............................................................................................................................. 26

Ethical Business Conduct ................................................................................................................... 26

Volatile Market Price for Securities of the Company ........................................................................ 27

Future Sales of the Company’s Securities by Directors and Executive Officers ............................... 27

Directors and Officers may have a Conflict of Interest ...................................................................... 27

Non-IFRS Financial Measures Definitions and Reconciliation ............................................................. 28


Management Discussion and Analysis of Financial Statements

This Management Discussion and Analysis (“MD&A”) of Smart Employee Benefits Inc. (the “Company”

or “SEB”) covers the annual consolidated financial statements and events during and subsequent to the

year ended November 30, 2015 up to the date of this report April 5, 2016. This MD&A should be read in

conjunction with the annual audited consolidated financial statements and the accompanying notes for the

years ended November 30, 2015 and 2014. All financial information is prepared in accordance with

International Financial Reporting Standards (“IFRS”). All dollar amounts are in Canadian dollars unless

otherwise indicated.

The Company is a reporting issuer in Ontario, Alberta and British Columbia, and is listed on the TSX-V

under the symbol “SEB”. SEB documents and securities filings can be viewed on the SEDAR website

(www.sedar.com) and additional information on the Company can be obtained via the Company’s

website at www.SEB-inc.com

Forward Looking Statements, Risks and Uncertainties

Certain statements in this MD&A may constitute “forward-looking” statements that involve known and

unknown risks, uncertainties and other factors, which may cause the actual results, performance or

achievements of SEB, or the industry, to be materially different from any future results, performance or

achievements expressed or implied by such forward looking statements. Forward-looking statements

include, but are not limited to, statements made under the headings “Company Overview” and “Risks and

Uncertainties” and other statements concerning the Company's 2016 objectives, strategies to achieve

those objectives, as well as statements with respect to management's beliefs, plans, estimates, and

intentions, and similar statements concerning anticipated future events, results, circumstances,

performance or expectations that are not historical facts. When used in this MD&A, such statements use

words such as “may”, “will”, “expect”, “believe”, “plan” or other similar terminology. These statements

are not guarantees of future performance and are subject to numerous risks and uncertainties.

The risks and uncertainties include: the ability to achieve profitability and manage growth; reliance on

and retention of competent staff; competition; performance obligations and client satisfaction; general

state of the economy; possible acquisitions; possible future litigation; insurance limits; legislative and

regulatory changes; revenue and cash flow volatility; operating risks; protection of intellectual property;

valuation mandates; and restrictions on growth. Refer to the detailed discussion of Risk Factors included

in this document. Given these risks and others described elsewhere in this document, investors should not

place undue reliance on forward-looking statements as a prediction of actual results.

These statements reflect management’s current expectations regarding future events and operating

performance and speak only as of the date of this MD&A, and, except in compliance with applicable law,

SEB assumes no obligations to update or revise them to reflect new events or circumstances.

Additionally, SEB undertakes no obligation to comment on analysis, expectations or statements made by

third parties in respect of SEB, its financial or operating results, or its securities.

Non-IFRS Financial Measures

This MD&A makes reference to certain non-IFRS measures. These non-IFRS measures are not

recognized measures under IFRS and do not have a standardized meaning prescribed by IFRS, and are

therefore unlikely to be comparable to similar measures presented by other companies. These measures

are provided as additional information to complement those IFRS measures by providing further

http://www.sedar.com/


understanding of the Company’s results of operations from Management’s perspective. Accordingly, they

should not be considered in isolation nor as a substitute for analysis of the Company’s financial

information reported under IFRS. Management uses non-IFRS measures such as EBITDA, and Adjusted

EBITDA (which are defined under the Definitions section of this report) to provide investors with a

supplemental measure of the Company’s operating performance and thus highlight trends in the

Company’s core business that may not otherwise be apparent when relying solely on IFRS financial

measures. Management also believes that securities analysts, investors and other interested parties

frequently use non-IFRS measures in the evaluation of issuers. Management also uses non-IFRS

measures in order to facilitate operating performance comparisons from period to period, prepare annual

operating budgets, and to assess its ability to meet future debt service, capital expenditures, and working

capital requirements.


Company Overview

SEB is a technology company which builds, implements and manages fully-integrated data processing

solutions. The Company offers game changing technology based solutions across multiple industry

sectors including government, health care, financial services, resource/energy and industrial/commercial.

SEB’s strategic vision is to become a major force in the processing and administration of health care

benefit transactions for privately and publicly funded plans. The Canadian target market has two

segments: Employee Group Benefits, in which annual spend is approximately $35.0 billion, and

Government Funded Benefits (federal and provincial), where $25.0 billion is spent annually.

Smart Employee Benefits Inc.’s global infrastructure is comprised of a corporate office and two operating

divisions: Technology and Benefits. The Technology Division currently serves corporate and government

clients across Canada and internationally. It also extends its infrastructure, expertise and services to the

Benefits Division which delivers Software as a Service (“SaaS”) and Business Process Outsourcing

(“BPO”) solutions to both corporate and government funded health benefit environments. The

Technology Division is a critical competitive advantage in supporting the implementation and operation

of SEB’s benefits processing solutions. The combination of the two operating divisions allows SEB to

provide end-to-end total processing solutions, all managed in one technology environment.

SEB’s core benefits technology solutions automate health benefits processing. It ties the administration

and processing of all benefit types into one environment and integrates seamlessly with all legacy client

systems to allow real-time, self-serve access of data. These modular solutions can either operate as an

integrated environment or on a standalone basis.

SEB’s solutions and expertise fall into six categories:

1. Health Benefits Administration and Claims Processing – Modular, fully integrated, end- to-end

Administration/Adjudication/Payments/Billing/Reporting software platform provided on a SaaS or BPO

model. SEB issues its own benefit cards.

2. Health & Wellness Integrated Platform – The platform focus is on education and prevention.

Modules include Content Library, Personal Health Assessment, Education Modules, over 80 applications

for managing health initiatives, Personalized report card and action initiative, integrated reward platform,

integrated organization health assessments, prevention/intervention programs, real time reports, personal

health records, etc.

3. Disability Management Platform – The platform automates the management of disability cases.

Modules include Benefits & Disability Portal, Absence Management, Audit Workflow, and Case

Management. The modules are implemented within a best practices environment.

4. Predictive Analytics and Fraud – Analysis of historical big data using algorithms facilitate the

creation of fraud identification rules which are incorporated in real-time adjudication environments and

may assist in pricing.

5. Enterprise Service Bus (“ESB”) – Business Process Data Management Module for tying legacy data

systems to new technology solutions, automating access to historic data.

6. Technology Infrastructure and Expertise – Extensive data management expertise including data

centers, PCI certified security, systems integration, business intelligence, software development, CRM,


BizTalk, PeopleSoft, BPO, ITIL, Professional Services, Hosting, Project Management, etc. This

infrastructure and expertise make everything work as an integrated solution.

Accomplished Milestones

Since inception, SEB has enhanced its proprietary health benefit claims adjudication and administration

software and acquired successful companies which support SEB’s processing technology and/or provide

sales channels through existing vendor relationships, project references and complementary health

services. The following is a timeline of accomplished milestones:

2011—Purchased the most advanced health claims adjudication technology available, and began

enhancing the adjudication component and developing the administration segment.

2012—Through a reverse takeover, became listed on the Toronto Venture Exchange enabling access

to broader finance.

2013—Acquired Logitek Technology Ltd.(“Logitek”), Somos Consulting Group Ltd. (“SOMOS”),

and 50% of Inforica Inc. (“Inforica”), technology companies which provide the Benefits Division

with both the necessary infrastructure, and sales channels.

2014—Acquired technology companies APS-Antian Professional Services Inc. (“Antian”) and

Stroma Service Consulting Inc. (“Stroma”) and health companies Adeeva Nutritionals Canada Inc.

(“Adeeva”), 75% of Meschino Health and Wellness Corporation (“Meschino”) and 50% of Banyan

Work Health Solutions Inc. (“Banyan”).

2015—Acquired 50% of health consulting company SEB Benefits and HR Consulting Inc.

(“SEBCON”); through Banyan, acquired 50% of Polon Analytics Inc.; sold the non-core Electronic

Data Interchange (“EDI”) business of Logitek; acquired technology company Paradigm Consulting

Group Inc. (“Paradigm”) and signed a Letter of Agreement to acquire Maplesoft Consulting Group

Inc. (“Maplesoft”) which closed subsequent to fiscal year end.

Future Growth

SEB intends to acquire additional client relationships and vendor status to support a complementary

organic growth environment with both employers and government. Targeted acquisitions are expected to

bring synergistic opportunities for cross selling, in addition to references necessary for successful

responses to Requests for Proposals (“RFPs”).

In the Benefits Division, acquisitions target third party administrators, as well as broker and

consultant organizations that provide solutions and services to employers. The objective is to secure

the client relationships and transition many of the front and back-office business processes to the SEB

technology platform over time.

In the Technology Division, SEB will consider companies which have established vendor

relationships, security clearances and project references that are required to bid on government health

contracts, in addition to technology providers with operations and/or products which are strategically

supportive of or complementary to Health Benefits processing/operations.

Acquisitions and investments in associate companies are made with the goal of obtaining positive cash

flows which are expected to contribute to the operating results of the Company, partially based on

restructurings and other initiatives Management has executed. The Company continues to acquire

companies which it believes will enhance the earnings capability of the Company. However, there are no

assurances that Management will be successful in achieving this goal.

Currently, the Company is engaged in raising debt financing with the intent of using the funds to retire

debt assumed as a result of the acquisition of Maplesoft in December, 2015 (see Notes 17 and 24 of the

consolidated financial statements), consolidate remaining debt and provide an acquisition facility for

future expansion. Management of the Company has to date been successful in raising capital through


equity and debt offerings. However, there is no assurance that the Company will continue to be successful

in the future.

Company Developments During and Subsequent to fiscal year ended November 30, 2015

Financial Discussion

Select Financial Highlights for the quarters and years ended November 30, 2015 and 2014

Since its inception in 2011, Smart Employee Benefits has pursued an acquisition based strategy which has

led to dynamic growth. During 2015, the Company had four transactions acquiring an interest in other

companies, the most notable being the acquisition of Paradigm in Western Canada. The consolidation of

11 months of Paradigm’s operating results (since its closing on December 31, 2014) has added over $22

million to SEB’s revenues. In addition to organic growth of the subsidiaries, 2016 revenues will also

reflect twelve months of Maplesoft which was acquired in December, 2015.

The Company noted in a news release dated January 20, 2016 that it expected to have a trailing Proforma

revenue of $102.9m. This was based on the assumptions that SEB would report approximately $50m for

2015 without Maplesoft and with Paradigm reporting 11 months. If the extra month for Paradigm was

added, and Maplesoft’s revenues were consolidated, the total would be approximately $103m, hence the

Proforma descriptor applied to the number. Due to a change in accounting for Banyan in fiscal 2016,

Banyan’s revenues will no longer be consolidated with the financial statements of SEB. SEB will reflect

50% of Banyan’s results under the “Equity income from associate investments” line on the Consolidated

Statements of Comprehensive Income (Loss), thereby reducing the originally projected amount for

revenues.

Gross margin for fiscal 2015 was 25% of revenues, an increase of 4% from the prior year. The margin

increase can be attributable to four things:

The consolidation of Paradigm. Paradigm, a professional services company, uses an employee model

unlike SOMOS which utilizes a contractor model. Employee models tend to generate a higher gross

margin as long as employees are fully billable and have little downtime;

The consolidation of Banyan. Banyan currently provides consulting services in Australia which are

contributing to higher margins then typically experienced in Banyan’s core business of managing

disability cases;

Contract re-pricing with existing clients at Logitek; and

The impact of streamlining operations.

2015 2014 Change 2015 2014 Change

Revenue $ 13,844,199 $ 4,260,462 $ 9,583,737 $ 50,347,299 $ 20,022,220 $ 30,325,079

Cost of revenues 10,245,072 3,297,053 (6,948,019) 37,713,677 15,743,422 (21,970,255)

Gross Margin 3,599,127 963,409 2,635,718 12,633,622 4,278,798 8,354,824

26% 23% 25% 21%

Adjusted EBITDA (1,159,957) (2,275,696) 1,115,739 (536,744) (4,745,452) 4,208,708

Gain on sale of a portion of business 24,837 - 24,837 1,124,837 - 1,124,837

Transaction costs 180,000 - (180,000) 1,010,127 - (1,010,127)

Write down of intangibles 551,516 - (551,516) 551,516 - (551,516)EBITDA (1,866,636) (2,275,696) 409,060 (973,550) (4,745,452) 3,771,902

Net Income (2,898,661) (3,133,091) 234,430 (5,753,902) (7,089,198) 1,335,296

Fiscal Year ended November 30Three months ended November 30


Adjusted EBITDA, representing on-going operation results, improved by $4,208,708 year over year and

$1,115,739 fourth quarter over fourth quarter prior year. This significant increase was a result of

acquiring both Paradigm and Banyan, both profitable entities.

The sale of Logitek’s EDI business added $1,124,837 to the EBITDA of the Company, which was offset

by the one-time transaction costs associated with the Paradigm acquisition and financing and the write-

down of intangibles and goodwill in SOMOS.

For the year ending November 30, 2015, the Company recorded a net loss of $5,753,902, an improvement

of $1,335,296 over fiscal 2014. In Q4, 2015, Net Loss improved by $234,430 over Q4, 2014.


Quarterly Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended November

30, 2015 and 2014

Sep

1, 2

015

to

Nov

30,

201

5

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1, 2

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to

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1, 2

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31,

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28,

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201

4

Jun

1, 2

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Aug

31,

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4

Mar

1, 2

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May

31,

201

4

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Feb

28,

201

4

Rev

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$ 1

3,84

4,19

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11,

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$ 1

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2,53

0 $

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281,

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$ 4

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$

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$ 5

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$

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7,

369,

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8,23

4 7,

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8,58

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290,

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3,82

6,13

1 3,

356,

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9,76

1 1,

340,

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1,35

8,42

3 1,

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1,06

8,47

0 29

7,88

8 61

5,14

0 61

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72

8,71

0,48

1 10

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8,

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467

3,29

7,05

3 4,

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4,44

1,27

1 3,

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154

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599,

127

3,16

8,50

9 3,

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873

2,72

0,11

3 96

3,40

9 1,

161,

985

1,31

3,26

8 84

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1,83

7,34

3 1,

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263

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0 1,

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1,69

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3 1,

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655

1,10

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6 84

4,57

7

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6,58

2 5,

637

373,

603

157,

837

593,

892

106,

071

275,

080

-

Prof

essi

onal

fees

986,

313

421,

658

416,

731

118,

078

242,

802

129,

160

128,

182

175,

595

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and

gene

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1,75

2,46

5 1,

131,

625

1,05

4,08

9 81

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4 74

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8 50

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Revenue

Revenue for the year ended November 30, 2015 was $50,347,299 compared to prior year’s revenue of

$20,022,220. The increase of $30,325,079 was primarily attributable to the acquisition of Paradigm

($22,019,327) and the change of control of Banyan which allowed for consolidation ($7,767,605). These

additions were complemented by organic growth in the other companies, less the reduction of the revenue

previously generated by EDI business which was sold in December, 2014.

On a quarterly basis, revenues increased from Q3 by $1,965,209. The rebound from reduced revenues

during the summer months is typical of seasonal fluctuations in the professional service industry where

both the revenues from Paradigm and SOMOS are derived. Revenues increased $9,583,737 from the

same quarter last year due to the inclusion of Paradigm and Banyan.

Cost of revenues

Compensation

The Compensation portion included in “Cost of revenues” reflects contractor/employee costs in

Paradigm, SOMOS, Logitek, Banyan and Inforica. During fiscal 2015, compensation costs increased by

$19,885,565 primarily due to the inclusion of Paradigm’s compensation ($18,167,459) and Banyan’s

compensation ($2,338,430).

These costs increased by $7,806,723 from the comparable quarter in the prior year. As with the full fiscal

year, the increase reflects the impact of consolidating Paradigm ($5,288,359) and Banyan ($121,702).

Other

“Other” under this classification represents expenses directly incurred to earn the revenue stream. This

includes sales commissions and cost of inventory. The increase of $2,084,690 over previous year is

consistent with the consolidation of Banyan which incurred $3,413,442 in this category. The increase in

“Other” costs as a result of Banyan were partially reduced by the reduction recorded in Logitek as a result

of the EDI business sale.

Salaries and other compensation costs

During the year, salaries expense increased by $886,212. In addition to the above noted acquisitions,

changes in salary expense were attributable to additional base resources added to meet the growing needs

and complexity of the organization, e.g. the addition of an investor relations resource. These costs were

offset by the impact of operational streamlining which took place in SOMOS during Q4, 2015.

The Company continues to enhance its Health Care Systems (“HCS”), specifically the claims adjudication

software and administration modules. The ongoing development work performed on the adjudication

software is performed by SEB employees. The amount of HCS development work expensed in the year

was comparable to last year’s expense of $668,391.

Share based compensation

Options are a non-cash incentive used by the Company to retain key employees. When issued, the

options are assigned a cost using a Black-Scholes calculation. The Company uses a “graded vesting”

system to allocate the cost to fiscal periods. Therefore the expense for the period does not rise and fall

according to options issued during that period. In fiscal 2015, share based compensation was $673,659,

$301,384 less than the previous fiscal year.

Professional fees

During the year, professional fees increased by $1,267,041 (excluding fees paid to professionals

categorized as transaction costs). This increase reflects the additional legal costs associated with the

increase volume and complexity of acquisitions, as well as the added costs of audit and review to meet the

requirements of both the TSX-V and the financing agreements.


Office and general

Office and general costs increased by $2,219,674 over fiscal year 2014. Of this, $1,916,362 was as a

result of the newly consolidated entities – Paradigm ($1,170,520) and Banyan ($745,842).

Change in fair value of contingent liability

Contingent consideration liabilities are discounted payables to vendors of acquired companies related to

future performance. SEB has recorded contingent consideration liabilities for Adeeva, Inforica, Paradigm

and Banyan. A change in the fair value of contingent liabilities of $46,381 was recorded as a result of a

change in the discount factor.

Equity income from associate investments

During fiscal 2014, SEB accounted for the Company’s share of Banyan earnings using the equity method

of accounting. Due to a change in circumstance in fiscal 2015, Banyan was accounted for using the

consolidation method. A more detailed discussion of the change in accounting for Banyan can be found

in the Operation discussion.

Gain on sale of a portion of business

The EDI business required a substantial capital investment, but was a non-core asset, so in December,

2014, Logitek sold it to Di Central for $2,150,000, and formed a strategic partnership with the buyer. The

sale proceeds were offset against a portion of intangibles from the original Logitek acquisition.

Transaction costs

Transaction costs are legal, financing and other professional fees associated with SEB’s acquisitions and

financings. In fiscal 2015, SEB expensed $1,010,127 of these costs primarily related to the acquisition of

Paradigm, and associated acquisition financing.

Write-down of intangibles

As part of the annual audit, the Company engages an external valuator to assess the carrying value of

acquired subsidiaries. This value is compared to the carrying value of intangibles for each company. As

a result of this assessment at the end of fiscal year 2015, the intangible assets of SOMOS (i.e. goodwill,

and customer relationships) were reduced by $551,516.

Interest

The Company incurred $497,756 more in interest charges during fiscal year 2015, than fiscal year 2014.

Of this, the largest piece pertains to the acquisition of Paradigm.

Accretion of interest

Interest accretion is associated with convertible debt. While convertible debt increased during the year,

accreted interest decreased by $41,507. This can be partly attributed to the conversion of $479,000 of

debt during fiscal year 2015.

Depreciation

Depreciation only increased by $29,269 in fiscal 2015, due to the acquisitions of Paradigm and Banyan,

neither of which is a capital intensive company.

Amortization

Amortization expense relates to the systematic write off of intangibles which were recorded on the

acquisition of entities. In fiscal year 2015, $2,783,598 was expensed as compared to $1,032,420 in the

previous fiscal year. The increase is as a result of the amortization of newly acquired intangibles

associated with the acquisition of Paradigm and Banyan. Details can be found on notes 6-8 of the annual

consolidated financial statements.


Quarterly Consolidated Statements of Financial Position for the fiscal years ended November 30, 2015

and 2014

No

v 3

0,

20

15

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g 3

1,

20

15

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y 3

1,

20

15

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28

,

20

15

No

v 3

0,

20

14

Au

g 3

1,

20

14

Ma

y 3

1,

20

14

Feb

28

,

20

14

Cash a

nd

cash e

quiv

ale

nts

$ 2

,84

8,3

63

$

2,5

76

,67

2

$ 2

,86

6,2

08

$

3,2

32

,97

1

$ 4

03

,09

6

$ 1

80

,86

2

$ 1

,73

7,5

35

$

70

7,6

87

Acco

unts

receiv

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le1

0,6

82

,64

7

9,0

32

,44

4

9,7

55

,16

2

10

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1,1

91

5

,09

2,7

77

5

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3,0

33

3

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0,4

19

3

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5,5

57

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s i

n l

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s t

rust

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-

-

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1,5

00

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0

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ry8

0,7

16

8

3,9

98

5

5,2

44

6

5,0

15

9

5,8

25

1

18

,92

8

10

8,8

62

-

Pre

paid

s a

nd

dep

osit

s5

57

,96

7

69

0,9

96

9

36

,41

8

75

5,1

40

4

64

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0

70

5,3

78

6

64

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2

79

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1

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tal

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ssets

14

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9,6

93

1

2,3

84

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0

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3,0

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1

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74

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7

6,0

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8

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94

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8

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5,3

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2

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2

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2

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-

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Asso

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-

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68

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2

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84

2,0

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8

59

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1

94

5,5

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1

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6

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9

83

7,6

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6

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6

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2,5

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6

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3,4

79

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2

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4

1,9

90

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9

2,7

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9

2,8

21

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1

2,8

62

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7

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llectu

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pro

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6,0

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8

4,3

33

8

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83

8

9,8

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9

2,5

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2

50

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0,0

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s6

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8,5

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6

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4,3

93

7

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6,6

98

6

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5,6

70

2

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3,8

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1

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3,6

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1

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9

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Assets

$ 3

6,8

24

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2

$ 3

7,6

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1

$ 3

7,0

54

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2

$ 3

9,4

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$ 1

8,8

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$ 1

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$ 1

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9

$ 1

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$ 4

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5,9

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$

3,7

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3,4

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$

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$ 1

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6

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4,7

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57

2,5

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4

54

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5

53

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4

72

1,5

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1

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7

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36

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37

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43


Cash and cash equivalents

The increase in cash of $2,445,267 over prior year can be attributed to both the acquisition of Paradigm

on December 31, 2014 ($1,721,327) and the consolidation of Banyan’s financial position ($971,192). A

more detailed discussion of cash flow can be found later in this report.

Accounts receivable

The accounts receivable balance at November 30, 2015 was $10,682,647, an increase of $5,589,870 since

November 30, 2014. The inclusion of Paradigm’s receivables of $4,181,228 and Banyan’s receivables of

$804,577 accounts for only a portion of this increase, the remainder is due to organic growth. Due to the

nature of SEB’s typical client (i.e. government or large corporation), less than 2% of the balance is over

90 days. A provision for uncollectible accounts has been put in place for any amounts in dispute or where

collectability is questionable.

Inventory

Adeeva, a nutritional supplements supplier, is the only SEB company which has inventory. During the

year, inventory decreased by $15,109 due to an interruption in supply of both nutritional supplements and

hyaluronic acid. New supplier arrangements are now in place, and inventory levels are expected to

increase.

Prepaids and deposits

During fiscal 2015, prepaids and deposits increased by $93,057. Of this, $72,631 can be attributable to

the acquisition of Paradigm and the consolidation of Banyan.

Advances to acquisition target

Subsequent to year end, on December 3, 2015, SEB completed the Maplesoft acquisition. Part of the

purchase agreement was an injection of working capital in the amount of $1,500,000 (supported by the

common and preferred shares of Maplesoft), and a $2,000,000 advance to Maplesoft shareholders

(secured against SEB shares). At November 30, 2015, both a $1,000,000 capital injection and $125,000

shareholder advance had been made.

Long term deposits

The long term deposit reflects the deposit for the corporate premises in Mississauga, Ontario where the

Company relocated to in Q3, 2014. In accordance with the tenancy agreement, a portion of the rent

payable in Q4, 2015 was deducted from the deposit, hence the reduction of $81,204 from the previous

quarter.

Associate investments

The amount of $3,300,892 on November 30, 2014 represents the Company’s 50% equity investment in

the Banyan Group which had been acquired on November 3, 2014. The amount was broken down

between initial consideration of $2,894,200, contingency performance liability of $378,500 and the

current year’s equity pick up of $28,192. At the beginning of fiscal 2015, SEB was granted the right to

nominate an additional Board Director which under IRFS established control of the organization requiring

consolidation of the results. In fiscal 2016, SEB no longer has the right to nominate an additional Board

Director, and Banyan will be accounted for using the equity method of accounting.

Equipment

Equipment is comprised of the depreciated value of furniture, computer hardware and computer hardware

under capital lease. The November 30, 2015 balance increased by $218,601 from November 30, 2014 as

a result of the inclusion of equipment of both Paradigm ($131,912) and Banyan ($227,170) offset by the

depreciation expense of all the entities.


Intangible assets

Prior to November 30, 2015 the Company acquired control of nine companies (Logitek, SOMOS,

Inforica, Antian, Adeeva, Stroma, Banyan, Paradigm and SEBCON). The difference between the

purchase price of these companies and the tangible assets has been attributed to intangible assets such as

software, intellectual property, customer relationships, trade names and goodwill. A valuator was

contracted to allocate the value of intangible assets for Banyan and Paradigm and test for impairment in

the value of other organizations. The purchase price allocations have been updated for both companies,

and as a result of the impairment testing, SOMOS’s customer relationships and goodwill were reduced.

Bank loan

During the second quarter of fiscal 2015, the Company obtained new credit facilities on behalf of

Paradigm Consulting Group and replaced the existing credit arrangement of SOMOS, Logitek and

Stroma. The balance of $7,838,497 ($1,482,208 at November 30, 2014) partially reflects both the

operating lines and the term loan associated with the financing of the acquisition of Paradigm. The

Company has calculated that it is in default with regard to the current ratio covenant of the SOMOS

facility as at November 30, 2015. As at the date of issue of the MD&A, the Company has not

obtained a waiver of the default. The Company has calculated that it may also be in default with

regard to the Debt to Equity covenant of the Paradigm facility. As a precaution the Company has re-

classified the non-current portion of the Paradigm term loan to the current portion of the term loan.

Accounts payable and accrued liabilities

Accounts payable and accrued liabilities at November 30, 2015 increased over the prior year by

$2,998,759. Of this amount, $3,447,647 arises from the consolidation of companies acquired over the

past 12 months.

Deferred revenue

Deferred revenue is the amount of licensing fees and consulting service revenue paid in advance of

services being rendered. This amount decreased by $148,956 over the prior year due to Logitek’s

renegotiation of supplier terms which increased the overall revenue stream, but decreased the upfront

payment.

Equipment leases and loans

Both equipment leases and loans have decreased over prior year reflecting the impact of monthly

repayments. No new equipment leases or loans were entered into.

Convertible debt

The net increase in convertible debt for the year of $725,566 reflects $1,106,390 convertible notes issued

on the acquisition of Paradigm, offset by conversions, and repayments.

Government remittances and current taxes payable

The liability for government remittances increased over prior year by $348,206. The increase stems from

the tax liability associated with the EDI business sale, offset by scheduled repayments of previously

outstanding amounts.

Short-term notes

During fiscal 2015, short term notes increased by $1,643,630, primarily from a note issued to the

Chairman of the Board for temporary financing. The note is described in further detail in note 14 of the

annual consolidated financial statements.

Contingent consideration payable

Contingent consideration payable is discounted liabilities to vendors of acquired companies related to

future performance. SEB has recorded contingent consideration liabilities for Adeeva, Inforica, Paradigm


and Banyan. Total contingent liabilities increased from November 30, 2014 by $1,264,176 primarily as a

result of the consideration given to former Paradigm shareholders. A change in the fair value of

contingent liabilities of $46,381 was recorded on the Statement of Comprehensive Loss as a result of a

change in the discount factor.

Deferred income taxes

Deferred income taxes arises from the timing difference of intangibles amortized for accounting purposes

versus for tax. This non-cash long term liability was adjusted in the year to reflect the valuations of both

Paradigm and Banyan, and the sale of Logitek’s EDI business.


Quarterly Consolidated Statements of Cash flows for the fiscal years ended November 30, 2015 and 2014

Sep 1, 2015 to

Nov 30, 2015

Jun 1, 2015 to

Aug 31, 2015

Mar 1, 2015 to

May 31, 2015

Dec 1, 2014 to

Feb 28, 2015

Sep 1, 2014 to

Nov 30, 2014

Jun 1, 2014 to

Aug 31, 2014

Mar 1, 2014 to

May 31, 2014

Dec 1, 2013 to

Feb 28, 2014

Net loss: $ (2,898,660) $ (1,380,299) $ (1,929,888) $ 454,945 $ (3,127,558) $ (1,685,673) $ (1,183,017) $ (1,092,950)

Add items not involving cash:

Income tax recovery (58,020) - - - (257,930) - - -

Amortization of intangible assets 658,849 716,647 724,772 683,330 391,672 249,287 194,378 197,084

Depreciation of equipment 53,270 103,731 65,714 35,008 150,807 24,188 28,231 25,228

Accretion of interest 178,958 191,118 187,892 194,512 441,873 138,722 122,960 90,431

Accrued interest 143,630 - - - - - - -

Write-down of intangibles 551,516 - - - - - - -

Gain on sale of business 75,163 - - (1,200,000) - - - -

Share-based compensation 136,582 5,637 373,603 157,837 593,892 106,071 275,080 -

Change in contingent liability 92,626 - - - - - - -

Equity income from associate investments - - - - (28,192) - - -

Non-cash working capital 797,279 545,597 327,440 (2,351,069) 1,239,912 (725,191) 233,835 (387,626)

Cash flows from (used in) operating activities (268,807) 182,431 (250,467) (2,025,437) (595,524) (1,892,596) (328,533) (1,167,833)

Cash flows from investing activities

Proceeds from sale of business - 100,000 - 1,750,000 - - - -

Advances to acquisition target (1,125,671) - - - - - - -

Purchase of software (240,326) (200,391) (430,014) (68,782) (141,702) - - -

Acquisition of Antian - - - - (357,701) - - -

Acquisition of Stroma - - - - (650,000) - - -

Acquisition of Banyan - - - - (1,575,000) - - -

Acquisition of Paradigm - - (7,974,270) - - - - -

Net cash on acquisition of Inforica - - - - (16,864) - - 29,064

Net cash on acquisition of Adeeva - - - - - - 6,209 -

Net cash on acquisition of Antian - - - - 357,701 - 98,458 -

Net cash on acquisition of Stroma - - - - 302,453 (650,000) - -

Net cash on investment in Banyan - - - 848,559 - - - -

Net cash on acquisition of Paradigm - - - 1,159,848 - - - -

Purchase of equipment (32,441) - (6,014) (5,626) 58,686 (137,283) (81,826) (26,625)

Dividend paid by Banyan (200,000) (150,000) - - - - - -

Cash flows from (used in) investing activities (1,598,438) (250,391) (8,410,298) 3,683,999 (2,022,427) (787,283) 22,841 2,439

Cash flows from financing activities

Proceeds from equity financings 2,400,000 - - - 3,000,000 - - -

Issue costs on equity financings (120,000) - - - (55,858) - - -

Proceeds from exercised warrants - - - 1,262,725 150 59,750 1,368,850 254,800

Proceeds from exercised options 67,999 135,063 1,313 56,000 26,375 9,100 22,438 4,725

Advances from shareholders - - - - 163,923 - (155,437) (8,486)

Repayment of equipment loans (3,125) (3,125) (3,968) (6,782) (5,375) (5,375) (13,208) (17,125)

Repayment of equipment leases (2,187) (5,289) (13,542) (16,678) (81,310) 44,377 (24,913) (27,101)

Proceeds/repayment of short term notes (606,130) 37,500 2,068,630 - (653,153) 672,699 (17,547) -

Proceeds/repayment of bank revolver 664,303 (41,770) 2,412,164 (90,908) 493,137 330,044 155,357 (343,149)

Proceeds from bank term loan - - 4,200,000 - - - - - Repayments from bank loan (262,500) (262,500) (262,500) - - - -

Proceeds from convertible debt - - - - 235,580 12,611 - 1,751,809

Issue costs on convertible debt - - - - (248,192) - - -

Repayment of convertible debt 576 (81,455) (108,095) (33,044) (35,092) - - -

Cash provided by flows from (used in) financing activities 2,138,936 (221,576) 8,294,002 1,171,313 2,840,185 1,123,206 1,335,540 1,615,473

Net change in cash for the period 271,690 (289,536) (366,763) 2,829,875 222,234 (1,556,673) 1,029,848 450,079

Cash, beginning of period 2,576,672 2,866,208 3,232,971 403,096 180,862 1,737,535 707,687 257,608

Cash, end of period $ 2,848,362 $ 2,576,672 $ 2,866,208 $ 3,232,971 $ 403,096 $ 180,862 $ 1,737,535 $ 707,687

**Certain of the numbers have been reclassified to be conform with current presentation

Quarters


Cash flows from operating activities

Cash used in operating activities for the year was $2,362,280, compared to cash used of $3,984,486 in the

prior year. Loss for the year improved by $1,335,296 while the add-back of non-cash adjustments

increased by $286,910.

Up until this year, the Company has been in the development stage and in the process of

developing/acquiring sustainable revenue for generation of cash flow. During this period, it has relied on

raising the necessary cash through issues of equity capital, debt which is convertible to equity capital and

debt, to fund acquisitions, operations and software development. The Company is targeting operations to

be self-sustaining and cash positive.

Cash flows from investing activity

Cash used in fiscal 2015 for investing activity was $6,575,128 compared to $2,784,430 in the previous

year. During the year, the Company invested net cash of $6,814,422 for the acquisition of Paradigm, and

while no additional cash costs were incurred for the change in control of Banyan, the change in

accounting for the company to the consolidation method led to the recording of $848,558 under “Net cash

on acquisition of Banyan”.

During the first quarter of 2016, the Company completed another material transaction, the purchase of

Maplesoft. Advances to Maplesoft and its former shareholders in the amount of $1,125,000 were made in

the final quarter of 2015. A more detailed discussion about the Maplesoft investment can be found in

under “Uncertainty of Liquidity and Capital Requirements”.

Cash flows from financing activity

Cash of $11,382,675 was generated through financing activities in fiscal 2015, representing a $4,468,272

increase from the prior year. During the year, Raymond James Ltd. (“Raymond James”) was engaged to

lead a syndicate of agents to complete a private placement of convertible debentures of the Company on a

“best efforts” basis. The net proceeds of the offering were to be used to fund the Company’s proposed

acquisition of Maplesoft, however, due to market conditions at the time, the effort was suspended, and the

acquisition was funded by alternative means. Subsequent to year end, Raymond James was again

engaged to provide finance sourcing alternatives to consolidate debt. Currently, the Company is in

receipt of term sheets and working with potential lenders as they undergo their due diligence.

SEB’s two primary financing sources are equity and debt financing. Equity financing involves stock

issuance, option exercise and warrant exercise. Debt financing includes convertible debt, bank financing

(revolving and term), short-term notes, and equipment loans and leases.

Equity financing

In 2014, SEB received proceeds of $3,000,000 for equity financing. During fiscal 2015, a strategic

investor subscribed to SEB stock in the amount of $2,400,000. This was the first tranche of a $4,000,000

private placement, the second of which was completed on December 7, 2015. The Second Tranche

financing consists of 4,000,000 units (the “Units”) at a price of $0.40 per Unit. Each Unit consists of (i)

one common share of SEB and (ii) one common share purchase warrant of SEB (the “Warrants”). Each

Warrant has a term of 24 months from the date of issuance and vests on December 31, 2016 at an exercise

price of $0.75 per share. All securities issued in connection with the financing are subject to a four month

hold period from the date of closing.

While the financing was non-brokered, pursuant to SEB’s previous engagement of finders, a cash fee of

4.49% of the gross proceeds raised in the private placement was incurred and finder warrants (the “Finder

Warrants”) equal to 8.975% of the number of Units of SEB (897,500 warrants) were issued. Each Finder


Warrant is exercisable for a period of 18 months from the closing date at an exercise price of $0.40 per

share.

SEB received $260,375 from the exercise of options ($62,638 in fiscal 2014), and the proceeds generated

from warrant exercises were $1,262,725 ($1,683,550 in prior year).

Convertible Debt

No new convertible debt was issued in fiscal 2015 for cash, unlike 2014 when SEB received proceeds of

$2,000,000. During the year, $222,018 convertible debt was repaid compared to $35,092 in the previous

fiscal year.

Subsequent to year end, Convertible notes of $1,950,000 which matured in February, 2016 were extended

until third quarter 2016 for additional consideration of 1% principal payable on maturity, and a change in

interest rate from 8% to 10% on the remaining term.

Bank debt

On March 10, 2015 the Company closed new credit facilities with a major Canadian Schedule I Bank in

the amount of up to $8,775,000. The credit facilities were obtained by Paradigm and SOMOS.

The $8,775,000 consists of:

i. A $4,200,000 term loan acquisition facility which was used in connection with the Corporation’s

acquisition of Paradigm. The acquisition facility bears interest at the Canadian Dollar Prime Rate to

Prime Rate plus 1.75%, depending on the amount advanced under the facility, has a term of 3 years

and may be repaid at any time without penalty.

ii. Paradigm has also obtained a $3,000,000 operating demand facility, bearing interest at the Prime Rate

plus 0.75% to 1.75%, depending on Paradigm’s debt to EBITDA ratio, along with a $50,000

corporate credit card.

iii. SOMOS obtained a $1,500,000 operating demand facility bearing interest at the Prime Rate plus

1.875% and a $25,000 corporate credit card. Concurrent with the new SOMOS facility, the Stroma

facility was terminated.

Both Paradigm’s new credit facilities and the new SOMOS facility are secured by a first charge over all

of the assets of certain subsidiaries of the Corporation, contain positive, negative and financial covenants,

and include other usual and customary terms and conditions. The Company, Paradigm, SOMOS and

certain other subsidiaries have provided guarantees pursuant to the new credit facilities. Fees and

warrants associated with the debt coordination were payable to an outside party.

The Company has calculated that it is in default with regard to the current ratio covenant of the

SOMOS facility as at November 30, 2015. As at the date of issue of the MD&A, the Company has

not obtained a waiver of the default. The Company has calculated that it is in default with regards to

the fixed charge coverage ratio and total funded debt covenants of the Paradigm facility. This was

due to non-recurring cash payments related to the acquisition, integration and financing for which the

Company has not received formal approval from the bank to exclude in its covenant calculations. As

a result the Company has re-classified the non-current portion of the Paradigm term loan of

$2,362,500 to the current portion of the term loan.

During fiscal 2015, the company received $7,143,789 from the above facilities, of which $787,500 of the

term loan was repaid. In the previous year, $635,389 financing was received from bank debt.


Short term notes

The company received short term financing from notes issued to the Board chairman in the amount of

$1,500,000. The loan bears a 10% interest rate.

Equipment loans and leases

The Company repaid its equipment loans and leases by $54,696 in fiscal 2015 compared to a $130,030 in

the previous year. No new equipment leases or loans have been entered into.

Operations Discussion

The Company is made up of three distinct divisions: Benefits, Technology and Corporate. The Benefits

Division offers a suite of products to clients ranging from claims processing to disability management.

The Technology Division encompasses professional services, system development, hosting and

infrastructure support and the Corporate Division manages the overall strategic direction of the

subsidiaries, executes acquisitions, negotiates financings and is accountable to the Board and

Shareholders.

Select consolidated segmented highlights for the years ended November 30, 2015 and 2014

Benefits Division

The Benefits Division includes the following active companies:

Banyan Work Health Solutions, Banyan Australia and BITS Licensing Inc. (Banyan)

SEB Analytics Inc.

SES Benefits Canada Corporation and SEB Administration Services Inc.

Adeeva Nutritionals Canada Inc.

Meschino Health and Wellness Corporation

SES Benefits and HR Consulting Inc.

BIG Benefits and HR Services Inc.

Benefits Division expansion

The Benefits Division invested in three new entities: SEB Benefits and HR Consulting, BIG Benefits and

HR Services Inc. and SEB Analytics Inc. On February 11, 2015 it secured 50% ownership of SEB

Benefits and HR Consulting (“SEBCON”). SEBCON provides SEB’s Benefits Division with the

industry knowledge and expertise along with references, to help organizations optimize the benefits and

Benefits Technology Corporate Total Benefits Technology Corporate Total

Revenues $ 9,419,883 $ 40,927,416 $ - $ 50,347,299 $ 1,328,292 $ 18,693,928 $ - $ 20,022,220

Cost of revenues 6,428,209 31,285,468 - 37,713,677 492,580 15,250,842 - 15,743,422

Gross Margin 2,991,674 9,641,948 - 12,633,622 - 835,712 3,443,086 - 4,278,798

Operating costs 3,421,425 6,412,127 2,616,774 12,450,326 1,700,380 3,757,850 1,672,318 7,130,548

Share-based compensation - - 673,659 673,659 - - 975,043 975,043

Equity in associate investment - - - - - - (28,192) (28,192)

Change in fair value of contingency - - 46,381 46,381 - - - -

Adjusted EBITDA (429,751) 3,229,821 (3,336,814) (536,744) (864,668) (314,764) (2,619,169) (3,798,601)

Gain on sale - 1,124,837 - 1,124,837 - - - -

Transaction costs - 1,010,127 - 1,010,127 - - - -

Write down of intangibles - 551,516 - 551,516 - - - -

EBITDA (429,751) 2,793,015 (3,336,814) (973,550) (864,668) (314,764) (2,619,169) (3,798,601)

Interest 33,046 410,375 601,150 1,044,571 32,413 96,845 417,557 546,815

Accretion of interest - 249,588 502,892 752,480 - 41,891 752,096 793,987

Income tax (recovery) 50,153 496,112 (604,285) (58,020) - - (257,930) (257,930)

Depreciation 60,436 197,287 - 257,723 39,323 189,131 - 228,454

Amortization 429,101 2,145,373 209,124 2,783,598 138,587 893,833 - 1,032,420

Net Income (Loss) $ (1,002,487) $ (705,720) $ (4,045,695) $ (5,753,902) $ (1,074,991) $ (1,536,464) $ (4,477,743) $ (7,089,198)

For the year ended November 30, 2015 For the year ended November 30, 2014


healthcare program management. This expertise and knowledge is a critical ingredient in providing full

service and end-to-end benefit solutions for corporate and government clients. In the second quarter, SEB

joined forces with the Business Improvement Group (“BIG”) to form BIG Benefits and HR Services Inc.

BIG Benefits and HR Services Inc. leverages BIG’s sales channels to promote the Health and Wellness

services offered by SEB, which includes SEB Benefits Administration, SEB HR and Consulting,

Disability Management from Banyan Work Health Solutions, and the Wellness Platform offered by

Meschino. And in the third quarter, Banyan joined forces with Polon Analytics Inc. to form SEB

Analytics Inc. This addition adds predictive modeling and advanced analytics capabilities to SEB’s suite

of offerings to provide customers with solutions that enable data-driven decisions that optimize pricing

and underwriting, disability management and healthcare fraud detection. These companies are still early

stage in revenue development.

The Company is actively reviewing acquisitions and joint venture opportunities, together with strategic

partnerships, as drivers of the Benefit Division's growth strategy. The growth focus in 2016 is the

Benefits Division. Prior to 2016, much of the focus had been on the Technology Division. SEB's

competitive advantage is technology, and it was imperative that the Company have a strong, profitable

Technology Division to enable SEB to capitalize on growth opportunities in its Benefit Division.

Banyan

Banyan operates as a Disability Management (“DM”) Third Party Administrator (“TPA”) serving

employers and disability insurers. Its offerings include claims management, field rehabilitation services

and a full range of specialized assessments/interventions to support its holistic approach to DM. Banyan

is also a provider of Disability Benefit Technology solutions. Banyan is now well established across

Canada and extends into the United States, Australia & New Zealand.

During the period December 1, 2014 to November 30, 2015, the Company had the ability to elect an extra

director which gave SEB control over Banyan. SEB used consolidation accounting during fiscal 2015 to

record its interest in Banyan. As of the beginning of Fiscal 2016, SEB does not have the right to elect an

extra director and will be reporting the Company’s share of Banyan’s earnings using the equity

accounting method.

In fiscal 2015, Banyan’s revenues were $7,767,605, which earned net income of $750,304. SEB’s

portion of income was 50%. In 2014, SEB included $28,192 in its results for the month of November,

2014.

Technology Division

The Technology Division includes the following active companies:

Somos Consulting Group Ltd.

Stroma Service Consulting Inc.

APS—Antian Professional Services Inc.

Logitek Technology Ltd.

Paradigm Consulting Group Inc.

Inforica Inc., Inforica Technology Solutions, and Inforica Energy Solutions

Technology Division expansion

On December 31, 2014, the Technology Division of SEB acquired all of the issued and outstanding

shares of Paradigm Consulting Group Inc. and all of the issued and outstanding units of PCGI Consulting

Services Partnership (collectively referred to as “Paradigm”). Paradigm has a 24-year history of

providing management and information technology consulting services to healthcare, insurance, financial

services, public sector, telecom and energy clients. With over 140 billable consultants, Paradigm is a

market leader for delivering management consulting, portfolio/program/project management and


application technology services to an enterprise level client base. Paradigm has a very deep portfolio of IP

for its key client verticals which enables accelerated delivery of projects and maintains long term client

relationships. In fiscal 2015, SEB included 11 months of Paradigm’s revenues ($22,019,327). Adjusted

EBITDA for Paradigm was $2,267,903 which includes a change in the contingent liability associated with

the purchase price of Paradigm and PCGI of $303,560

.

The Company laid the ground work for further expansion of this Division through the signing of a Letter

of Agreement on June 10, 2015 to acquire Maplesoft. As one of the largest established consulting firms

operating in the federal government environment, Maplesoft is perceived to be a highly valued

asset. Maplesoft management has represented that it has a number of large contract vehicles, a well-

established workforce, solid client relations and a positive and sustainable EBITDA. Due diligence has

been performed and the transaction was completed subsequent to year-end on December 3, 2015.

After strategic review of its assets, and a re-alignment to focus on the Company’s core mission of

servicing the Personal Health Sector, SEB divested the EDI business held by Logitek Technology Ltd.

On December 14, 2014, Logitek entered into an agreement with DiCentral Corporation (“DiCentral”) to

jointly service the EDI market. As part of this transaction, DiCentral acquired the existing EDI business

for $2,150,000. Logitek’s “EDI” business represented approximately 37% of Logitek’s total sales.

Divisional restructuring

Operating changes continue to be made to each of the entities to streamline operations, reduce costs, and

leverage synergies between the companies. During the first quarter, SOMOS was amalgamated with

SOMOS Information Technology and Adelante Management. In the second quarter, the consulting

contracts and references of Stroma were transitioned to SOMOS which will manage that business

segment on a go-forward. The Stroma Engineering Division was also transitioned to Inforica. It is

anticipated that Maplesoft, SOMOS, and Antian will be amalgamated in 2016 and that Paradigm will be

amalgamated with Stroma.

Corporate Division

The Corporate Division includes the following active companies:

Smart Employee Benefits Inc.

Smart Employee Solutions Inc.

Financial Discussion

During the year, $2,616,774 was expensed in the Corporate Division for salaries, professional services

and office and general costs, an increase over 2014 costs which were $1,672,318. This increase reflects

the additional legal costs associated with the increase volume and complexity of acquisitions, as well as

the added costs of audit and review to meet the requirements of both the TSX-V and the financing

agreements.

Investor Relations

During the year, multiple road shows and investor presentations were held. As a result, the Company

initiated analyst coverage with a number of prominent investment dealers. SEB also retained market-

making services with BBS Securities Inc. which is expected to facilitate the trading of SEB securities on

the TSX-V. Subsequent to year end, Bristol Capital Ltd. (Bristol) was engaged to provide investor

relations services.


Board of Directors

Subsequent to year end, Keith Harris, a Director of SEB since it was first listed on the TSXV in 2012,

resigned. Mr. Harris was originally a Director of the Capital Pool Company with which SEB completed a

reverse takeover to become a public company. We thank Mr. Harris for his contribution as a Director.

Risk and Uncertainties

The Company’s growth and performance are subject to a number of risks such as consumer demand,

client acceptance of the Company’s products and services, industry competition, technological

obsolescence, obtaining and retaining competent staff and failure to obtain sufficient capital to build the

required infrastructure.

Going Concern

The consolidated financial statements have been prepared on a going concern basis which presumes that

the Company will continue in operation for the foreseeable future and will be able to realize assets and

discharge liabilities in the normal course of its operations. The audited financial statements do not reflect

the adjustments or reclassifications of assets and liabilities which would be necessary if the Company

were unable to continue as a going concern.

As at November 30, 2015 and 2014, the Company has a working capital deficiency of $8,759,191 and

$2,274,864, and an accumulated deficit of $21,608,641 and $15,499,981, respectively. For the years

ended November 30, 2015 and 2014, the Company incurred a net loss and comprehensive loss of

$5,753,902 and $7,089,198, respectively, and negative cash flow from operations of $2,362,280 and

$3,984,486, respectively. These conditions raise significant doubt about the ability of the Company to

continue as a going concern without additional equity or debt financing.

To remain a going concern, the Company will require additional capital to enable it to further develop its

software and generate future positive cash flows. It cannot be determined at this time whether these

objectives will be realized. Management of the Company has to date been successful in raising capital

through equity and debt offerings. However, there is no assurance that the Company will continue to be

successful in the future. Currently, the Company is engaged in raising debt financing with the intent of

using the funds to retire debt assumed as a result of the acquisition of Maplesoft in December, 2015 (see

Notes 17 and 24 of the financial statements), supply working capital and finance future acquisitions.

The Company continues to make investments in entities which it believes will enhance the earnings

capability of SEB. Acquisitions and investments in associate companies are made with the goal of

obtaining positive cash flows which are expected to contribute to the operating results of the Company,

partially based on restructurings and other initiatives Management has executed within the acquisitions.

However, there are no assurances that Management will be successful in achieving this goal.

Uncertainty of Liquidity and Capital Requirements

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall

due. The Company currently settles its financial obligations such as accounts payable out of cash. The

Company’s future liquidity is dependent on factors such as the ability to generate cash from operations

and to raise money through debt or equity financing.

The Company has calculated that it is in default with regard to the current ratio covenant of the

SOMOS facility as at November 30, 2015. As at the date of issue of the MD&A, the Company has

not obtained a waiver of the default. The Company has calculated that it may also be in default with


regard to the Debt to Equity covenant of the Paradigm facility. As a precaution the Company has re-

classified the non-current portion of the Paradigm term loan to the current portion of the term loan.

In December, 2015, the Company closed the acquisition of Maplesoft by assuming a total debt of

$14,382,028, which included a revolving facility of $5,900,000. Term Debt repayment is scheduled as

follows:

In addition, $2,000,000 of convertible debt is maturing on May 13, 2016, and $1,950,000 of convertible debt is

maturing on August 12, 2016.

The Company is actively pursuing alternative financing sources to retire the Maplesoft debt and the

convertible debt described above.

The borrowings of the Company under the Debt Facility and certain Notes are secured by its lenders by a

general security agreement (“GSA”) over substantially all of the assets of the Company. Should the

Company not meet its covenants or obligations under these borrowing agreements when due, there is the

risk that its lenders may realize on its security and liquidate the assets of the Company.

The future capital requirements of the Company will depend on many factors, including the number and

size of acquisitions consummated, rate of growth of its client base, the costs of expanding into new

markets, the growth of the market for healthcare services and the costs of administration. In order to meet

such capital requirements, the Company may consider additional public or private financing (including

the incurrence of debt and the issuance of additional common shares) to fund all or a part of a particular

venture, which could entail dilution of current investors' interest in the Company. There can be no

assurance that additional funding will be available or, if available, that it will be available on acceptable

terms. If adequate funds are not available, the Company may have to reduce substantially or otherwise

eliminate certain expenditures. There can be no assurance that the Company will be able to raise

additional capital if its capital resources are depleted or exhausted. Further, due to regulatory impediments

and lack of investor appetite, the ability of the Company to issue additional common shares or other

securities exchangeable for or convertible into common shares to finance acquisitions may be restricted.

Credit Risk

Credit risk is the risk of loss associated with the counterparty's inability to fulfill its payment obligations.

For financial assets, this is typically the gross carrying amount, net of any amounts offset and any

impairment losses. In the normal course of business, the Company is exposed to credit risk from its

customers and the related accounts receivable are subject to normal industry credit risk. To mitigate this

risk the Company primarily deals with blue chip and government clients and reviews the creditworthiness

of material new customers, monitors customer payment performance and, where appropriate, reviews the

financial condition of existing customers. The Company establishes an allowance for doubtful accounts

that corresponds to the specific credit risk of its customers and economic circumstances. As at November

Repayment of Term Debt Assumed with Maplesoft Acquisition ($000s)

Fiscal 2016 4,869$

Fiscal 2017 925

Fiscal 2018 60

Fiscal 2019 790

Fiscal 2020 1,838

8,482$


30, 2015 the allowance for doubtful accounts was $61,235 (2014 - $92,291) and the accounts that were

past due amounted to $596,587 (2014 - $815,861). The Company is not exposed to any significant credit

rate risk.

Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate

because of changes in market interest rates. The bank loan bears interest at floating rates and as such is

subject to interest rate cash flow risk resulting from market fluctuations in interest rates. A 1%

appreciation (depreciation) in the interest rate would result in a change in interest expense of

approximately of $78,275. Management believes that the Company is not currently exposed to any

significant interest rate risk.

Reliance on Contracts with Key Customers

Revenues attributable to the Company’s businesses are dependent upon certain significant customers.

There can be no assurance that the Company’s contracts with its key customers will be renewed or that

the Company’s services will continue to be utilized by those key customers. There could be material

adverse effects on the businesses of the Company if a key customer does not renew its contracts with the

Company, or elects to terminate its contracts with the Company in favour of another service provider.

Further, there is no assurance that any new agreement or renewal entered into by the Company with its

customers will have terms similar to those contained in current arrangements, and the failure to obtain

those terms could have an adverse effect on the Company’s businesses. Through acquisitions the

Company has expanded its sales channels which it intends to leverage for a broader suite of services. By

expanding the client base, SEB reduces reliance on specific key customers.

Acquisitions and Integration

The Company has and continues to expect to make acquisitions of various sizes that fit particular niches

within SEB's overall corporate strategy. There is no assurance that it will be able to acquire businesses on

satisfactory terms or at all. These acquisitions will involve the commitment of capital and other resources,

and these acquisitions could have a major financial impact in the year of acquisition and beyond. The

speed and effectiveness with which SEB integrates these acquired companies into its existing businesses

may have a significant short-term impact on the Company’s ability to achieve its growth and profitability

targets.

The successful integration and management of acquired businesses involves numerous risks that could

adversely affect SEB's growth and profitability, including that:

(a) Management may not be able to manage successfully the acquired operations and the integration may

place significant demands on management, thereby diverting its attention from existing operations;

(b) Operational, financial and management systems may be incompatible with or inadequate to integrate

into the Company’s systems and management may not be able to utilize acquired systems effectively;

(c) Acquisitions may require substantial financial resources that could otherwise be used in the

development of other aspects of the business;

(d) Acquisitions may result in liabilities and contingencies which could be significant to the Company's

operations; and

(e) Personnel from SEB’s acquisitions and its existing businesses may not be integrated as efficiently or

at the rate foreseen.

The acquisition of companies or assets involves a long cost recovery cycle. The sales processes for the

products that these companies offer are often subject to lengthy customer approval processes. Failures by

the Company in achieving signed contracts after the investment of significant time and effort in the sales

process could have an adverse impact on the Company`s operating results.


To mitigate the above noted risks, the Company performs significant due diligence on acquisition targets,

and identifies both risks and opportunities before finalization.

Information Technology Systems

SEB's businesses depend, in part, on the continued and uninterrupted performance of its information

technology systems. Sustained system failures or interruptions could disrupt the Company's ability to

operate effectively, which in turn could adversely affect its business, results of operations and financial

condition.

The Company's computer systems may be vulnerable to damage from a variety of sources, including

physical or electronic break-ins, computer viruses and similar disruptive problems. Despite precautions

taken, unanticipated problems affecting the information technology systems could cause interruptions for

which the Company’s insurance policies may not provide adequate compensation.

SEB’s risk mitigation strategy for its information systems includes the maintenance of secure

infrastructure, third party monitoring, and disaster recovery strategies.

Confidentiality of Personal and Health Information

The Company and its subsidiaries' employees have access, in the course of their duties, to personal

information of clients of the Company and specifically their medical histories. There can be no assurance

that the Company's existing policies, procedures and systems will be sufficient to address the privacy

concerns of existing and future clients. If a client's privacy is violated, or if SEB is found to have violated

any law or regulation, it could be liable for damages or for criminal fines or penalties.

SEB takes client privacy very seriously and complies with all aspects of the PIPEDA legislation.

Employees are trained on privacy, and sign written acknowledgement and non-disclosure agreements.

Further data is maintained in restricted areas on a secure infrastructure.

Key Personnel

The Company believes that its future success will depend significantly upon its ability to attract, motivate

and retain highly skilled executive management. In addition, the success of each business unit depends on

employing or contracting, as the case may be, qualified professionals. Currently, there is a shortage of

such qualified personnel in Canada. The Company will compete with other potential employers for

employees and it may not be successful in keeping the services of the executives and other employees,

including professionals that it requires. The loss of highly skilled executives and professionals or the

inability to recruit these individuals in markets that the Company operates in could adversely affect the

Company's ability to operate its business efficiently and profitably. To mitigate these risks, the SEB

provides a competitive compensation package.

Accounting, Tax and Legal Rules and Laws

Any changes to accounting and/or tax standards and pronouncements introduced by authorized bodies

may impact on the Company's financial performance. Additionally, changes to any of the federal and

provincial laws, regulations or policies in jurisdictions where the Company operates could materially

affect the Company's operations and its financial performance. The Company may also incur significant

costs in order to comply with any proposed changes. The Company's failure to comply with laws,

regulations or policies may expose the Company to legal or regulatory proceedings which could have a

material impact on the Company's financial performance. Through continuous education and training,

SEB employees are kept abreast of the changing legal and regulatory environment before changes come

into effect, allowing the Company to sufficiently plan for any anticipated impact.


Internal Control over Financial Reporting and Disclosure Controls and Procedures

The Company may face risks if there are deficiencies in its internal control over financial reporting and

disclosure controls and procedures. Internal controls over financial reporting are designed to provide

reasonable assurance regarding the reliability of financial reporting and the preparation of the financial

statements for external reporting purposes. Management is responsible for establishing and maintaining

adequate internal controls over financial reporting appropriate to the nature and size of the Company.

Management does not expect that Company’s disclosure controls and procedures and internal controls

over financial reporting will prevent all error and all fraud. A control system, no matter how well

designed and implemented, can provide only reasonable, not absolute, assurance that its objectives will be

met. Further, the design of a control system must reflect the fact that there are resource constraints, and

the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all

control systems, no evaluation of controls can provide absolute assurance that all control issues within a

company are detected. The inherent limitations include the realities that judgments in decision-making

can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be

circumvented by individual acts, by collusion of two or more people or by management override of the

controls. Due to the inherent limitations in a cost-effective control system, misstatements due to error or

fraud may occur and not be detected. Any deficiencies, if uncorrected, could result in the Company's

financial statements being inaccurate and in future adjustments or restatements of its financial statements,

which could adversely affect the price of the shares and SEB's business, financial condition and results of

operations.

The Company needs to comply with financial reporting and other requirements as a public company

The Company is subject to reporting and other obligations under applicable Canadian securities laws and

TSX-V rules, including National Instrument 52-109. These reporting and other obligations place

significant demands on the Company’s management, administrative, operational and accounting

resources. Moreover, any failure to maintain effective internal controls could cause the Company to fail to

meet its reporting obligations or result in material misstatements in its consolidated financial statements.

If the Company cannot provide reliable financial reports or prevent fraud, its reputation and operating

results could be materially harmed, which could also cause investors to lose confidence in the Company’s

reported financial information, which could result in a lower trading price of its securities.

To mitigate these risks, the Company hires seasoned professionals as employees/contractors, and has a

strong working relationship with its auditors, which provide annual control assessments and

recommendations to the Management and the Audit Committee. The Management and Board, in

conjunction with its Audit Committee, are responsible for assessing the progress and sufficiency of

internal controls over financial reporting and disclosure controls and procedures and make adjustments as

necessary.

Capital Investment

The timing and amount of capital expenditures by the Company will be dependent upon the Company's

ability to utilize credit facilities, raise new debt/equity, generate cash from operations, meet working

capital requirements and sell additional shares in order to accommodate these items. There can be no

assurance that sufficient capital will be available on acceptable terms to the Company for necessary or

desirable capital expenditures or that the amount required will be the same as currently estimated. Lack of

these funds could limit the future growth of the Company and its subsidiaries and their respective cash

flows. To mitigate the situation, the Company is actively pursuing alternative financing with the aid of an

experienced financing institution.

Ethical Business Conduct

A violation of law, the breach of Company policies or unethical behaviour may impact on the Company's

reputation which in turn could negatively affect the Company's financial performance. The Company has


established policies and procedures, including a Code of Business Conduct, to support a culture with high

ethical standards.

Volatile Market Price for Securities of the Company

The market price for securities may be volatile and subject to wide fluctuations in response to numerous

factors, many of which are beyond the Company’s control, including the following:

• actual or anticipated fluctuations in the Company’s quarterly results of operations;

• changes in estimates of future results of operations by the Company or securities research analysts;

• changes in the economic performance or market valuations of other companies that investors deem

comparable to the Company;

• addition or departure of the Company’s executive officers and other key personnel;

• release or other transfer restrictions on outstanding securities;

• sales or perceived sales of additional securities;

• significant acquisitions or business combinations, strategic partnerships, joint ventures or capital

commitments by or involving the Company or its competitors; and,

• news reports relating to trends, concerns or competitive developments, regulatory changes and other

related issues in the Company’s industry or target markets.

Financial markets have recently experienced significant price and volume fluctuations that have

particularly affected the market prices of securities of companies and that have, in many cases, been

unrelated to the operating performance, underlying asset values or prospects of such companies.

Accordingly, the market price of the securities of the of the Company may decline even if the

Company’s operating results, underlying asset values or prospects have not changed.

Additionally, these factors, as well as other related factors, may cause decreases in asset values that are

deemed to be other than temporary, which may result in impairment losses. As well, certain institutional

investors may base their investment decisions on consideration of the Company’s environmental,

governance and social practices and performance against such institutions’ respective investment

guidelines and criteria, and failure to meet such criteria may result in a limited or no investment in the

Company’s securities by those institutions, which could adversely affect the trading price of the

Company’s securities. There can be no assurance that continuing fluctuations in price and volume will not

occur. If such increased levels of volatility continue, the Company’s operations and the trading price of

the Company’s securities may be adversely affected.

To mitigate, the Company has engaged an Investor Relations firm which will assist with communication

of the industry, the market and the Company to the investment community.

Future Sales of the Company’s Securities by Directors and Executive Officers

Subject to compliance with applicable securities laws, directors and executive officers and their affiliates

may sell some or all of their securities in the Company in the future. No prediction can be made as to the

effect, if any, such future sales will have on the market price of the Company’s securities prevailing from

time to time. However, the future sale of a substantial number of securities by the Company’s directors

and executive officers and their controlled entities, or the perception that such sales could occur, could

adversely affect prevailing market prices for the Company’s securities.

To mitigate this risk, SEB has put in place policies, procedures and guidelines which prevent trading of

securities during certain periods.

Directors and Officers may have a Conflict of Interest

Certain of the directors and officers of the Company may also serve as directors and/or officers of other

companies and consequently there exists the possibility for such directors and officers to be in a position


of conflict. Any decision made by any of such directors and officers involving the Company are being

made in accordance with their duties and obligations to deal fairly and in good faith with a view to the

best interests of the Company.

Non-IFRS Financial Measures Definitions and Reconciliation

This MD&A includes certain measures which have not been prepared in accordance with IFRS such as

EBITDA and, Adjusted EBITDA. These non-IFRS measures are not recognized under IFRS and,

accordingly, users are cautioned that these measures should not be construed as alternatives to net income

determined in accordance with IFRS. As these measures do not have standardized meaning subscribed

under IFRS, and may not be comparable to similar measures used by other companies, the following

definitions are provided, and a reconciliation table is noted below:

“EBITDA” is defined as earnings before interest, interest accretion, income taxes, depreciation of

equipment and amortization of intangibles.

“Adjusted EBITDA” is operating earnings before one-time expenses. It is defined as earnings before gain

on sale of a portion of the business, transaction costs, write-down of intangibles, interest, interest

accretion, income taxes, depreciation of equipment and amortization of intangible assets. The Company

believes that Adjusted EBITDA is a meaningful financial metric as it measures cash generated from

operations which the Company can use to fund working capital requirements, service interest and

principal debt repayments and fund future growth initiatives.

“Transaction costs” is defined as legal and other professional costs associated with the acquisitions.

The below table, reconciles both EBITDA and Adjusted EBITDA to “Net Loss and Comprehensive Loss”

as presented in the Consolidated Statements of Comprehensive Loss:

30-Nov-15 30-Nov-14

Net Loss and Comprehensive Loss $ (5,753,902) $ (7,089,198)

Interest 1,044,571 546,815

Accretion of interest 752,480 793,987

Income tax expense (recovery) (58,020) (257,930)

Depreciation 257,723 228,454

Amortization 2,783,598 1,032,420

EBITDA: (973,550) (4,745,452)

Gain on sale of a portion of business 1,124,837 -

Transaction costs 1,010,127 -

Write down of intangibles 551,516 -

Adjusted EBITDA: (536,744) (4,745,452)

SMART EMPLOYEE BENEFITS INC · SMART EMPLOYEE BENEFITS INC: MANAGEMENT DISCUSSION AND ANALYSIS – NOVEMBER 30, 2015 6 BizTalk, PeopleSoft, BPO, ITIL, Professional Services, Hosting,

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